NCLT Hyderabad Upholds Invocation of Bank Guarantees and Appropriation of Margin Money Post-CIRP Commencement

Hyderabad, Telangana – April 9, 2025 – The National Company Law Tribunal (NCLT), Hyderabad Bench, comprising Shri Rajeev Bhardwaj (Member Judicial) and Shri Sanjay Puri (Member Technical), has delivered a significant ruling affirming that performance bank guarantees can be invoked and associated margin money can be appropriated by banks even after the commencement of the Corporate Insolvency Resolution Process (CIRP) and approval of a resolution plan. The Tribunal dismissed two interconnected applications, IA (IBC)/1806/2023 and IA (IBC)/440/2023, filed in the insolvency proceedings of M/s. Viceroy Bangalore Hotels Pvt Ltd.

The NCLT held that bank guarantees constitute independent contracts, and margin money for such guarantees is held in trust for the beneficiary, thus falling outside the scope of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), and remaining unaffected by clauses in a resolution plan aiming to extinguish pre-CIRP liabilities.

Case Overview

The applications were filed by M/s. Edelweiss Asset Reconstruction Company Limited (Edelweiss ARC), a financial creditor of Viceroy Bangalore Hotels Pvt Ltd (Corporate Debtor/CD), which was admitted into CIRP on August 5, 2022. A resolution plan by M/s. Dharampal Satyapal Limited was subsequently approved on May 22, 2023, leading to the merger of the CD with the successful resolution applicant.

IA (IBC)/1806/2023: Edelweiss ARC sought directions against the Customs authorities (Respondent 1 & 2) to not encash bank guarantees (BGs) issued by Kotak Mahindra Bank (Respondent 3) on behalf of the CD. It also sought to direct Kotak Mahindra Bank not to release amounts to the Customs authorities and to release the margin money to Edelweiss ARC as per the resolution plan.

IA (IBC)/440/2023: This application, initially filed by the Resolution Professional and later pursued by Edelweiss ARC, sought a declaration that Kotak Mahindra Bank ’s (Respondent 1) appropriation of the CD's fixed deposits (margin money) amounting to Rs. 80,05,218/- during the CIRP was illegal and sought its reversal. This was in context of BGs invoked by the Deputy Commissioner of Customs (Respondent 2).

The central issue in both applications revolved around whether BGs could be invoked and margin money appropriated by the bank after CIRP initiation and approval of a resolution plan that purportedly extinguished all prior liabilities.

Arguments Presented

Applicant's (Edelweiss ARC) Contentions:

Extinguishment of Liabilities: Argued that the approved Resolution Plan extinguishes all pre-CIRP liabilities of the Corporate Debtor, including claims from the Customs Department. Specific clauses of the plan (Clause 33(viii)(e), Schedule 2, Part III Point No. 13.21) were cited to support this.

Binding Nature of Resolution Plan: Referenced the NCLT's order approving the plan, which stated it was binding on all creditors, including government authorities, and that all crystallized and unclaimed liabilities would stand extinguished.

Supreme Court Precedents: Relied on Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. , which held that once a resolution plan is approved, all claims not part of it stand extinguished.

Illegal Invocation/Appropriation: Asserted that any attempt to invoke BGs or appropriate margin money post-resolution plan approval would be an illegal violation of the plan's terms.

Moratorium Violation (in IA 440/2023): Claimed that appropriation of fixed deposits by Kotak Bank during the moratorium period was contrary to Section 14 of the IBC.

Respondents' ( Kotak Mahindra Bank and Customs Authorities) Contentions (Primarily Kotak Bank ):

Locus Standi (Countered by Applicant): Kotak Bank initially questioned Edelweiss ARC's locus standi to file IA 1806/2023, though Edelweiss presented authorization from other creditors.

Margin Money as Trust: Argued that margin money (in the form of fixed deposits) provided for BGs is held in trust for the beneficiary (Customs) and is not an asset of the Corporate Debtor. It does not fall under 'Security Interest' as per Section 3(31) of the IBC.

Independent Contract: Stated that BGs are independent contracts between the issuing bank and the beneficiary, and their renewal occurred during the CIRP.

NCLAT Precedents: Relied on NCLAT judgments like Monitoring Agency of Anush Finlease & Construction Pvt. Ltd. Vs. State Bank of India & Ors and Punjab National Bank vs. Supriyo Kumar Chaudhuri & Ors , holding that margin money is a trust.

No Violation of Moratorium: Contended that appropriation of margin money against invoked BGs does not violate Section 14 of the IBC.

(The Customs authorities were set ex-parte in IA 1806/2023 due to non-appearance).

NCLT's Reasoning and Legal Principles Applied

The NCLT, in its detailed orders, dismissed both applications, relying on established legal principles:

Bank Guarantees as Independent Contracts: The Tribunal reiterated the settled law, citing Supreme Court judgments like Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation and Industrial Finance Corporation of India Ltd. v. Cannanore Spg. and Wvg. Mills Ltd. , that a BG is an autonomous contract between the issuing bank and the beneficiary, enforceable irrespective of disputes in the underlying contract, except in cases of fraud or irretrievable injustice. > "It is a settled position of law that a Bank Guarantee constitutes an independent and autonomous contract between the issuing bank and the beneficiary, enforceable irrespective of disputes in the underlying contract between the beneficiary and the CD." (Para VI.2, IA 1806/2023)

Moratorium (Section 14 IBC) Inapplicable to Performance Guarantees: The Tribunal highlighted the 2018 amendment to Section 14(3) of the IBC, which clarifies that the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor. Further, performance guarantees are excluded from the definition of "security interest" under Section 3(31) of the IBC and thus fall outside the scope of the moratorium. > The NCLT cited GAIL (India) Limited v. Rajeev Manaadiar & Ors. (NCLAT), which held that "the moratorium under Section 14(1)(c) of the IBC does not extend to performance bank guarantees..." (Para VI.5, IA 1806/2023 & Para 6(v), IA 440/2023)

Margin Money Held in Trust: The Tribunal emphasized that margin money or fixed deposits earmarked against performance BGs are held in trust for the beneficiary. > " Additionally , margin money or fixed deposits earmarked against the performance bank guarantees are held in trust for the beneficiary of the guarantee." (Para VI.6, IA 1806/2023) > It referred to NCLAT rulings in Punjab National Bank & Ors. v. Supriyo Kumar Chaudhuri and Indian Overseas Bank v. Arvind Kumar , stating that the CD retains no ownership rights over assets placed in trust unless the trust is extinguished or the beneficiary releases the asset.

Resolution Plan Cannot Override Settled Law on BGs: The NCLT concluded that any clause in the Resolution Plan seeking release of margin money cannot override the established legal position regarding the rights of the BG beneficiary and the issuing bank. > "Any clause in the Resolution Plan seeking release of the margin money/fixed deposits to the Corporate Debtor is of no consequence and cannot override the settled legal position governing the rights of the beneficiary of the bank guarantees and the issuing bank." (Para VI.8(c), IA 1806/2023)

Final Decision and Implications

The NCLT dismissed both IA (IBC)/1806/2023 and IA (IBC)/440/2023. The key findings were: * The invocation of bank guarantees by the Customs authorities was valid. * Kotak Mahindra Bank was entitled to appropriate the margin money/fixed deposits upon such invocation. * Clauses in the Resolution Plan attempting to release this margin money to the Corporate Debtor (or its acquirer/creditors) were deemed inconsequential against the backdrop of the settled law on bank guarantees.

This judgment reinforces the distinct nature of performance bank guarantees and the margin money securing them within the insolvency framework. It underscores that such instruments generally remain insulated from the moratorium effects and the 'clean slate' provided by a resolution plan, particularly when they secure obligations like those to statutory authorities under schemes such as the Export Promotion Capital Goods (EPCG) Scheme. The decision provides clarity for financial institutions and beneficiaries of bank guarantees in CIRPs.